Monday, January 09, 2012
7:04:37 PM EDT

Ahead Of Earnings, Stocks Eke Out Gains

by
Todd Shriber

It was a Monday of meager gains, but gains nonetheless as all three major U.S. indexes closed higher ahead of the start of fourth-quarter earnings. German Chancellor Angela Merkel and French President Nicolas Sarkozy, the duo affectionately known as ''Merkozy,'' were meeting again to try to hash out a plan for Europeâ€™s sovereign debt woes and just that meeting helped stocks trade higher.

Market Stats

For those that are fans of stock market history, the fact that stocks closed higher today is significant because it means the S&P 500 is higher on the fifth trading day of the new year than it was when the year started. My parents got me a copy of the Stock Trader's Almanac for Christmas and since I do not want to copy directly from those guys without their permission, I will merely say it is fun reading and I encourage you to get a copy to see just how good the odds are the S&P 500 will finish higher for the year now that the index moved higher over the first five trading days of 2012.

If there is any bad news in terms of historical market musings it might come in the form of the lethargic performance of small-caps to start the year. Those that are believers in the January Effect might be concerned that small-caps, as measured by the iShares Russell 2000 Index Fund (NYSE: IWM), are slightly lower to start the year. The January Effect assumes small-caps will be leaders to start the new year. Maybe that will materialize and it is worth noting IWM is not all that far removed from its 200-day moving average.

Russell 2000 ETF Chart

Good news for beleaguered gold bugs. Goldman Sachs was out with a bullish call on the yellow metal today, saying Comex-traded gold could jump to $1,940 an ounce in 12 months aided by depressed interest rates here in the U.S. That price is not much higher than the September 2011 record we saw, but gold has tumbled more than 15% since then. Morgan Stanley is even more bullish on gold. That bank said gold may average a record $2,200 an ounce, Bloomberg reported.

It will be interesting to see how accurate those predictions on gold are. Last year, investors pulled a net $372 million from the SPDR Gold Shares (GLD), the largest gold ETF, but the December outflow number was over $2.24 billion.

Gold Chart

To be sure, this was not a real ''Merger Monday,'' but there was one sizable deal to discuss and it actually leaked out last Friday. Pharmaceuticals giant Bristol-Myers Squibb (BMY) is buying Inhibitex (INHX) for $2.5 billion. You may recall that in November when Gilead Sciences (GILD) ponied up $11 billion for Pharmasset (VRUS), I, along with many others, opined that that deal would probably touch off more mergers and acquisitions activity among big pharma companies looking for ways to get their hands on potentially lucrative Hepatitis C treatments.

Before I delve too deeply into that, I am going to stand on one of my favorite soapboxes: Suspicious options trading leading up to a deal announcement. It was reported that someone bought 2,000 Inibitex $10 calls last Friday for $2 per contract. Nice move considering the stock closed at $23.70 today. What makes that options buying all the more, shall I say interesting, is the fact that last Tuesday Inhibitex lost 8% and the following day the stock was down as much as 16%.

Oh well. Better to be lucky than good, I suppose. For those of us that do not have that type of good fortune, the field of potential Hepatitis C takeover candidates has been narrowed to two: Achillion Pharmaceuticals (ACHN) and Idenix Pharmaceuticals (IDIX).

Oddly enough, Idenix was downgraded to market perform by JMP Securities today, but Bank of America raised its price objective on the stock to $18, well above the $9.67 the stock closed at.

Idenix Chart

For its part, Achillion probably was not moving higher today just because of the deal for Inhibitex. The companyâ€™s Phase II trial for its Hepatitis C drug is apparently going well as interim results released today indicate. That probably piques the interest of possible suitors even more.

Achillion Chart

After hours, Dow component Alcoa (AA), the largest U.S. aluminum maker, kicked off the fourth-quarter earnings parade by reporting a loss of $34 million, or 3 cents a share on revenue of $5.99 billion. Alcoa said it has a debt-to-capital ratio of 35% and free cash flow of $906 million.

''Alcoa turned in solid performance in a volatile year by responding quickly to changing market conditions and relentlessly managing cash. We stayed focused on growth and took aggressive action to cut costs, improve our competitiveness, and strengthen our balance sheet,'' said Alcoa Chairman and CEO Klaus Kleinfeld said in a statement.

Pennsylvania-based Alcoa said aluminum demand climbed 10% last year and the company is forecasting a 7% increase this year. The company plans to trim capacity by 12% to improve its competitive position and earlier today said it would reduce capacity at a smelter in Italy and two in Spain.

It seems like Alcoa always reports on a Monday, so I get to include that news in this wrap and as I always say, do not expect a $9.43 to move the Dow, a price-weighted index. Alcoa is up just two cents in the after-hours session and remains the second-lowest priced stock in the Dow buffered from the basement by only Bank of America (BAC).

Alcoa Chart

Looking at the charts, closed right around 1280 and that means the next hurdle is some fairly stiff resistance at 1285. The best case scenario for getting through that area is Europe at least remaining quiet, earnings reports that are positive surprises following previous warnings and a fresh round of dividend increases sure would not hurt. If 1285 results in one of those January sell-offs, the S&P 500 probably returns to the 1260-1265 range and from there 1250 becomes an issue.

S&P 500 Chart

The Dow is back to flirting with 12,400 and as I said, I do not expect Alcoa to do much for the Dow in either direction. Mondayâ€™s close puts the index less than 35 points away from resistance at 12,425 and support is 12,200. There are no more Dow components reporting this week until JPMorgan Chase (JPM) on Friday before the bell.

As an aside, I am not sure if this means the risk on trade is really back on, but it is interesting to note that CAT is up almost 4% to start the year while PG is flat and Coca-Cola (KO) is down more than 2%.

Dow Chart

The Nasdaq was fortunate to eke out a gain today, but the same cannot be said of the Nasdaq 100. Apple (AAPL) and Amazon (AMZN) both traded lower, but Google (GOOG) was the real problem, tumbling more than 4.2% after Motorola Mobility (MMI), the smartphone maker Google is acquiring (some would say for too much), forecast fourth-quarter sales of $3.4 billion. That is well below the $3.88 billion analysts were expecting. For the composite, support is 2660 and resistance is 2680.

Nasdaq Chart

I cannot say I have been impressed with much of anything thus far in 2012, as I said before, gains are gains. That said, it would be nice to see small-caps show a little more moxy and give fund managers a reason to get involved with that group. Something else that I found interesting is the performance to start the year by the Utilities Select Sector SPDR (XLU) and the Consumer Staples Select Sector SPDR (XLP), two obvious defensive plays and two of the best performing sector funds from 2011. XLU is down 2.6% while XLP is down about 1.5%. On the other hand, the Materials Select Sector SPDR (XLB) is up almost 1.5%.